Demand and supply curves

Economics AS · The price system and the microeconomy. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

Demand in economics means effective demand: wanting a good and being able to pay for it. A demand curve slopes downwards because more is bought at a lower price. A supply curve slopes upwards because firms offer more at a higher price. The market curve is found by adding the quantities of all individuals or firms at each price.

The most tested idea is the difference between a movement and a shift. A change in the good's own price causes a movement along the curve. A change in any other factor causes a shift of the whole curve: to the right for an increase, to the left for a decrease.

Rules to remember

Effective demand: willingness to buy backed by the ability to pay.
Market demand (or supply) = sum of the individual quantities demanded (or supplied) at each price.
Demand shifts with: income, prices of substitutes and complements, tastes and advertising, population, expected future prices.
Normal good: demand rises when income rises. Inferior good: demand falls when income rises.
Supply shifts with: costs of production, technology, indirect taxes and subsidies, weather, number of firms, prices of other goods the firm could make.
A specific tax or a rise in unit costs shifts supply upwards (to the left) by that amount; a subsidy or lower costs shift it downwards (to the right).
Change in own price: movement along the curve (extension or contraction), never a shift.

Common mistake

Students shift both curves when only one has changed. If supply shifts and the price changes, demand does not shift: there is a movement along the demand curve.

Worked example

A market has 50 small firms and 10 large firms. At $10, each small firm supplies 20 units and each large firm 300 units. At $12, each small firm supplies 30 units and each large firm 400 units. By how much does market supply rise when the price rises from $10 to $12?

Market supply at $10 = (50 × 20) + (10 × 300) = 1,000 + 3,000 = 4,000 units.
Market supply at $12 = (50 × 30) + (10 × 400) = 1,500 + 4,000 = 5,500 units.
Rise = 5,500 − 4,000 = 1,500 units. This is a movement along the market supply curve.

Answer: Market quantity supplied rises by 1,500 units.

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